Financial Planning, Millennials

15 vs. 30 Year Mortgage? And How Much To Put Down For A Downpayment?

We are oftentimes told that we should avoid debt at all costs. But I don’t think that is the best idea nor do I think it is likely to avoid all debt.

I would agree that you should try to avoid high interest debt, personal loans, credit card debt, etc. since all of those are what I consider ‘bad debt’. However, you may need to incur debt for a mortgage, car, business, etc. throughout life. The key is to make sure you don’t over leverage yourself and buy more than you can afford! 

How Much To Put Down For A House?

For a house specifically, very few people have the cash to buy it without a mortgage, and that’s okay. A good goal is to have enough cash for a 20% down payment when possible so you don’t have to add on private mortgage insurance (PMI) to the loan. For those that don’t know, PMI is basically some interest added on to your mortgage since you put down less than 20% making you a less credible lender. PMI is not ideal but it is not the end of the world either. It will go away once you reach 20% equity in your home. Because of this, your goal should be 20%, but it is definitely not required. In most cases you only need 3-5% down (however in today’s market, you may not win bidding wars with such little cash down) to be able to buy a house. The less you put down, the larger the mortgage is meaning you will be paying more per month.  

15 vs 30 Year Mortgage?

When you go to get a mortgage you have the option of 15, 20, or 30 years. Your parents or coworkers may tell you to go with a 15 year mortgage so you pay less in interest. And while this is true, you would pay less in interest, does it matter that much? And is going with a shorter loan the better option? 

30 years ago it would make a massive difference as interest rates were near 8%. When you have debt with an interest rate that high, you should absolutely be trying to pay it off as quickly as you can. The thing is that interest rates are low today. ​​You can get a mortgage from anywhere between 2.5% – 4% which is pretty low historically.  When the interest rate you face is significantly lower than what you would expect to make in the market, then you would rather pay the minimum on the debt and invest the difference. It is important to note that this is the spreadsheet, textbook answer. This doesn’t take into account the emotional component of having debt, this is just the numbers for right now. 

With mortgage rates being so low, your objective shouldn’t be to eliminate your mortgage as fast as you can if you are comfortable with debt. This is a main reason why I prefer 30 year mortgage rates over shorter ones. But it is not the #1 reason. The #1 reason I prefer 30 year mortgages over 15 or 20 is because of flexibility. If you pick a 15 year then all the sudden you take a job with lower pay, you or your spouse loses their job, you start a business, medical conditions come about, etc. you could find yourself in trouble because you can’t afford the payment. With a 15 year, you don’t really have many options in any of the situations above except for refinancing. However, you have no idea if in the future you will even be able to refinance your mortgage. What if interest rates have significantly gone up at that time? You’d be in trouble. With a 30 year mortgage you still have the option to pay off the mortgage in 15 years if you want to. There is nothing stopping you from paying it off quicker. But you aren’t forced to. 

The 30 year gives you options on speeding it up when you want to or keeping the same cadence when you want to as well. 

On top of that, too many people think about the total interest cost you can save by speeding up the mortgage but don’t consider the investment gains you are missing by using those extra dollars for debt instead of investing. 

They also don’t take into consideration the lack of flexibility to slow down the payment schedule when various life events occur. I prefer to plan for flexibility and options as much as possible. It’s freeing. At the end of the day, you don’t want your mortgage to hold you back from doing what you want to do in life. For those reasons, I prefer 30 year mortgages and not paying them off quicker. 

I do understand that some may disagree. If you hate debt and it gives you anxiety, it may make sense to pay off your mortgage quicker. Or if you have all your other goals covered, it also may make sense to pay it off with the additional surplus you have.

The decision is definitely personal to you and your situation. Back in the 80’s and 90’s, paying off your mortgage quicker was a no brainer with how high interest rates were. But it’s a different story today.  

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Disclaimer: talk with your CPA or financial planner before implementing any of these strategies. None of this should be seen as advice, it is just for informational purposes